How to Determine Support and Resistance Points in Trading
How to Determine Support and Resistance Points in Trading - Determining the right Support (S) and Resistance (R) points is sometimes difficult to do. Why? Many reasons can be given, where one of them is maybe traders don't really know what SR is and how to determine it.
As a trader, determining Support and Resistance points is one of the basic skills that you must master. These two levels are places where there is a tendency for the price to move significantly.
Each place has certain biases, and if the bias is in line with the wishes of market participants, then there will be movements known as breakouts and rejections.
Basic Concepts of Support and Resistance
A support point, often known as a market "floor", is defined as the lower limit of a downward movement in the market.
When the price is able to reach the support point, the bias that appears is that the price will rise again. Vice versa, the Resistance point or "Roof" of the Market is defined as the upper limit of the upward movement of the market. The market will show a Bearish bias when the price is able to reach this level.
When viewed from the other side, this Support and Resistance point actually describes places where price impulses occur due to an exchange of power between sellers (seller) and buyers (buyer).
For example, when EUR/USD falls towards a Daily Support level, a Rejection occurs which is marked by the appearance of a Pin Bar Candlestick. This rejection shows 2 things, namely:
- Many sellers have released their positions.
- Many buyers have entered the market.
If linked deeper, SR is actually related to supply and demand in the market. The Support point is the same as the Demand zone, while the Resistance point is the same as the Supply zone.
Why Can There Be Support And Resistance Points?
Support and Resistance points are actually not magic places that can cause prices to move up or down.
These Support and Resistance points are actually a reflection of the psychology of market participants themselves. Market participants here are divided into 3, namely buyers, sellers, and traders who are silent or do not place any positions.
For example, the price of a currency pair has decreased to a strong support point, then turned up significantly. The increase from this support level gave rise to 2 types of psychology in traders, in the form of:
- Fear: This fear arose from traders who had already entered a Sell position at that time. Usually, these traders hope that the price can at least fall back to BEP so that the position can be closed, before changing direction to become a buyer.
- Greed: This sense of greed arose from traders who entered Buy positions at that time. Usually, these traders regret not buying more when the price drops. They will hope that the price can fall again to increase the profit from their Buy position.
Although the two are different, each trader hopes to get a "second chance" to be able to buy back the currency pair. This hope that arises from greed and fear is what causes prices to bounce at certain points in the market.
Actually there are many ways to determine Support and Resistance points. Some technical extremists even think that the price is able to stop and form 1 candlestick because there are support and resistance points at that level.
However, on this occasion, we will only discuss the 3 methods that are most often used. These methods are Visual, calculation, and the use of indicators.
Also Reads:
Determining Support and Resistance Points With Visual Observation
The first way to determine Support and Resistance points is by connecting the High/Low values. This method is one of the simplest methods of determining support and resistance points. Look at the image below for more details:
In a nutshell, you just have to pay attention to the points where there is a lot of rejection at that level. You are also free to use the tail and body as a benchmark for drawing lines.
The more often the price is rejected from a level, the stronger the status of the Support or Resistance point will be. Apart from horizontal lines, there are also other visual ways to determine Support and Resistance points.
This method is used in drawing the Trendline Channel. The Upper Channel is the Resistance point, while the Lower Channel is the Support. This approach is slightly different, bearing in mind that in order for a Channel to form there are certain conditions that must be met.
Another visual observation on the market is the Round Number. This method of determining Support and Resistance points explains that a level with round numbers that is easy to remember has the potential to be a strong level. These round numbers are also often referred to as market psychological levels.
Calculating Your Own Support And Resistance Points
Calculation of Support and Resistance points with this calculation method is usually used in trading using Pivot Points.
This calculation is taken from values such as High (highest price), Close (closing price), and Low (lowest price) on the Chart. The main advantage of this calculation method is that it is easy to analyze on several time frames at once. The following formulas are often used in calculating Support and Resistance points.
As you can see above, the basis of the calculation depends on the Pivot Point in a period of time. It is from the Pivot value that values such as R1 and S1 can be determined. In its use, there are also R2 and R3 as well as S2 and S3. Each of these levels has a different level of validity and strength.
Miraculously, these values are usually not much different from the ranges obtained from the visual data. This closeness is considered to be able to eliminate subjective biases that will arise when determining Support and Resistance points visually.
Determining Support And Resistance Points With Indicators
The easiest way to determine Support and Resistance points is to use indicators that are available on Metatrader, as well as other trading platforms. Indicators can be ideal Support and Resistance points. Because the indicators themselves are calculated and obtained from calculations that use price and time as variables, especially indicators of the first derivative of price such as Moving Averages.
Here are some indicators that can be used to determine support and resistance points.
Moving Average
Moving Average is an indicator that is often used to determine Support and Resistance points, given its position as a direct derivative of price. Moving Average is calculated from the average price movement over a certain period of time.
But not all Moving Averages can also be used as Support and Resistance points. The tendency is, the smaller the period of the Moving Average, the smaller the strength contained therein.
The moving averages that are known to be effective as support and resistance points themselves are the SMA-50, SMA-100 and SMA-200. determine-points-support-and-resistanc.
Bollinger Bands
Bollinger Bands is another well-known indicator that is often used by traders around the world. This indicator is often used to measure market volatility over a certain period of time.
But did you know that Bollinger Bands can also be used as Support and Resistance points? determine-point-support-and-resistance
Bollinger Bands are often used to determine Support and Resistance points when the line fluctuations are flat. BB horizontal or Flat is a situation when the price is in a Sideways condition.
Under these circumstances, Mid, Low and Top BB will look very flat and parallel to each other. These are the times when the Top and Low BB lines can become Support and Resistance.
Summary
In addition to the several methods and indicators above, there are still many ways to determine support and resistance points in the market. Even though there are many ways, still most traders more often use visuals as a benchmark in determining support and resistance points.
Therefore, if you want to practice placing Support and Resistance points well, practice your visual skills well in distinguishing turning points on the chart. Want to learn more?
You can add insight and knowledge by watching the video below. This video explains in detail how to determine strong support and resistance points in the market.
Previously Post:
0 Response to "How to Determine Support and Resistance Points in Trading"
Post a Comment